Method for determining the current value of a company by examining and comparing the financial ratios of relevant peer groups, also often described as comparable company analysis or comps). The most widely used multiple is the price-earnings ratio (P/E ratio) of stocks in a similar industry. Using the average of multiple PERs improves reliability but it can still be necessary to correct the PER for current market conditions.
Any ratio that uses the share price of a company in conjunction with some specific per-share financial metric in order to evaluate a company’s financial situation. The share price is typically divided by a chosen per-share metric to form a ratio.
Price-to-earnings ratio is popular in the investment community. Earnings power is the primary determinant of investment value. Price-to-earnings ratio is using earnings per share (EPS)3. Some companies have basic and diluted earnings per share in the income statement. Diluted earnings take account of the possibility that some convertible securities could increase the number of common shares outstanding.4 Diluted earnings per share should be used. There are two version of P/E ratio as trailing and leading P/E ratio. The P/E ratio has a disadvantage. Because, earnings are prone to manipulation.
Price to sales ratio is relatively volatile in comparison to other ratios. This ratio is suitable for growth companies. A requirement for a growth company is strong consistent sales growth.
Some common price multiples are the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, and the price-to-sales (P/S) ratio. These ratios are used in conjunction with other fundamental metrics, such as EBIDTA, in order to give analysts and investors a quick initial impression of whether a company would make a good viable investment. However, because these multiples are very simplistic, they should not be the only measure of assessing a potential investment.